Thursday, July 1, 2010

Why A 5th Round of Pork Reserve Purchases?

The Ministry of Commerce, National Development and Reform Commission, and Agricultural Development Bank have announced another round of pork reserve purchases. This is the fifth round since late April. The idea of the reserve purchase program is to prevent the pork price from going so low that farmers kill off their sows, leading to a shortage and soaring prices later on.

An online article notes that the hog price has started recovering in the northern regions and it has stopped falling in the south. So why another round of purchases? The author proposes several reasons.

The hog-grain price ratio is still in the "red" region, under 5:1. According to the regulations for the "hog price alert" program introduced in 2009, when the ratio is this low the government should buy pork for reserves and give 100-yuan per head subsidies for breeding sows and boars on designated farms in "pork surplus counties."

The inventory of hogs is declining, and there are fears that pork supplies will be disrupted. At the end of March the hog inventory was 433.7 million head, down 7.53% from the beginning of the year; the breedable sow inventory was 47 million, down 4.28% since the beginning of the year. The reserve purchases are intended to raise hog farmers’ incentives.

The author suggests that the intervention is also intended to aid the feed industry. Feed mills are squeezed between high corn, fish meal, and soy meal prices and slow sales due to the depressed livestock industry. The pork price intervention is intended to give the entire industry chain a push.

The author suggests that the livestock slaughter rectification program is also intended to address depressed prices for pork. The widespread food safety problems--sale of pork from dead or sick pigs, toxic additives in feed, and pumping water into pigs before slaughter--scares off consumers and reduces prices. The rectification program is intended to restore confidence and increase demand and prices.